How Can We Invest in Infrastructure Without Raising Taxes?

(Odysseus Bostick is a Los Angeles teacher and former candidate for the Los Angeles City Council. He writes The Bostick Report for CityWatch.)

Our roads are swiss cheese, our sidewalks are like a broken fault line, our bridges are sagging, and our cars are still the most convenient way to get through the mess.

We’ve gotten to the point where our infrastructure problems are so large in scope and the cost to change this is so high that we really can’t pass enough taxes or bonds to cover all of our needs. That’s not to say that passing specific bonds isn’t necessary.

Upcoming ballot measures within the County of Los Angeles aimed at extending Measure R are not just merited, but crucial to ensuring that all the money we’ve already spent on building a basic network of light isn’t wasted. And finishing our rail lines is just Phase One.

The basic structure of a rail transportation system won’t be the cure-all because logistics prevent even a vast network of rail lines from actually getting people to the places they need to go. Clearly, we need micro-networks to cover areas that rail doesn’t reach.

Some of these solutions are small in scope – like bike share programs, walkable/bikeable design, and the like. Others are larger in scope than that, like a streetcar.

The problem is that bonds and tax increases only go so far and funding the build out of our rail network will consume most of those big scope revenue increases. So we are posed with the question of how to fund the smaller scale, “end of the line” public transportation ecosystems so that a user has access to the nooks and crannies not conveniently located at the base of the train station platform?

Credit: Luis Sinco/Los Angeles Times

Reality is, though many of us might be “hard core” enough to walk that last mile or two, most people will just go back to their car at that point, thus rendering the investments we’ve made in rail a bust. Correspondingly, political reality limits the scope of new bonds or taxes and passing an extension to Measure R will be a Battle Royale.

This mandates that we find creative investment streams to complement the full build out of a truly functional infrastructure network. These can’t all be new revenue streams. Some must be reallocated streams.

One really exciting model I think deserves far more consideration partners government infrastructure investments with public pension plan portfolio allocations to identify portions of the retirement portfolio that could be dedicated to infrastructure projects.

The advantages of this model are many, but my two favorites are the synchronicity of efforts and timelines.

In efforts, you’re looking to support livable retirements while investing in infrastructure improvements that build quality of life and foster economic growth in the private sector, which in turn, adds to the general fund in increased tax revenue to build more robust city services and yes, help fund the retirement plans. It’s also synchronous in the sense that your public labor force is investing not just a career in their city, but also their retirement security in a well-run city. That mutually beneficial relationship paves the way for a collaborative effort by taxpayers and their public employees.

In timelines, both pension plans and government infrastructure investments of large scope work because they can leverage longer periods of time than a private investment stream. That’s why bonds work to fund large scope infrastructure projects (like the transcontinental railroad) and why private capital for those “public good” projects is not relied on. Simply put, private capital needs shorter term profits whereas pension funds and government investments can wait longer to see profit.

This kind of partnership, however, doesn’t work for every kind of project mainly because the pension fund does need a quantifiable and reliable profit to be paid at some point. An example of a bad project would be sidewalks. How do you easily identify the kind of profits needed to make a pension pay out when that fund is investing $4.5 billion in road or sidewalk repair? It’s tough to quantify the benefit to the pension payout. It’s possible that some creative economist may one day develop a mechanism to do such a thing. All you creative economists listening out there, get to work.

In the meantime, there are infrastructure investment projects in public transportation where you have a quantifiable profit in fares collected.

One project I can’t seem to shut up about is a streetcar running down Lincoln and up Venice Blvd to connect the Expo station in Santa Monica with the Expo station in Culver City. That would be a $250 million project with quantifiable investment returns. Partnering with a pension fund like LACERS (operating an $11.4 billion portfolio) would be a win-win for building out a fully integrated infrastructure network, repairing an injured relationship between the city, taxpayers, and our municipal employees, and ensuring that investments by the taxpayers are maximizing public good for the city. The pension fund would, obviously, be a partner in the fare profits in order to ensure the security of the fund.

And I would add that cost efficiencies in running such a streetcar by these public employees would be higher than in a project whose success was not tied directly to their pensions.

While shifting the approach of investments as long range as pension funds takes time, I believe this approach merits strong consideration. The pensions must be funded no matter what, meaning that taxpayers here in the city (and county) must pay for them. It would be intelligent policy if those costs could benefit the taxpayers even more than ensuring a secure retirement for our public sector labor force. It would be great if that investment provided multi-dimensional benefits that foster the growth of our economy as well while ensuring that the tax increases from Measure R are not wasted because we failed to connect riders from the train stations to the places they really wanted to go.

A streetcar that runs in mixed traffic down Lincoln Blvd and Venice Blvd would be a dreadful idea. It would run slower than a bus due to objects getting in its way and no way to go around them. The East San Fernando Valley Transit Corridor project team dropped streetcars as one of the potential alternative transit improvement choices along Van Nuys Blvd for not having any advantage over buses.

How about just getting a bus that looks like a streetcar inside and out, like the Van Hool Exquicity:

What is the optimal amount of infrastructure and how do we know we haven’t exceeded that amount? Other cities get by with far fewer road lane-miles per capita than Los Angeles, so it would appear that a strategic divestment is warranted at this time.

Irwin Chen

Not even that is necessary. I will take reliable bus over fancy bus. Lincoln and Venice Blvd will benefit greatly with high quality bus only lane.

Fakey McFakename

I’m not sure this piece presents enough evidence for a lot of its assertions, and the pension fund idea seems risky (indeed, if these investments are already authorized and haven’t been made, it suggests that they offer poor returns; pension trustees have a duty to beneficiaries to invest in the best investments).

But some sort of improved Venice transit makes sense. It’s an old Pacific Electric route. But BRT would probably make a lot more sense than an expensive mixed-traffic streetcar.

boboblacksheep

Venice is just another wide road that used to have trains on it that needs to be updated. Sunset is another great example. Bus only lanes and cycle tracks. A street car with its own ROW or even ROWish would be nice but bus only lane and proper bike infa would be much cheaper and be nice.

Kenny Easwaran

It seems to me that there are two separate proposals here, which can be separated. One is using the pension fund as a source of up-front money that needs to be paid back later (with appropriate return on investment). This seems like a useful idea if bonds for long-term investments can’t be sold on the market to private investors. But I don’t know whether that’s a problem right now.

The second proposal is that the city can invest in a streetcar (or perhaps some other transportation initiative, or streetscape, or something else) that will pay back this investment plus large returns. We all believe that the value of many such projects is much greater than the cost of building them. The question is just how the city can collect enough of that value in revenue to pay for the initial investment. Bonds (or pension investment) allow us to collect that value back over time rather than needing it all to return right away, but there’s still the question of how the city can monetize the investment.

As far as I can tell, the answer to that question is not included in this post – you say “That would be a $250 million project with quantifiable investment returns.” You suggest a sentence or two later that the returns will be entirely in terms of farebox recovery. But I’m not sure how realistic that is.

Of course, since the value of a streetcar (or better yet, a bus-only lane, or even perhaps a light-rail system that is basically a streetcar running in a dedicated lane) will also accrue to residents, business owners, and landowners, it would also make sense to fund the financial returns not with fares, but with a land value gain tax – assess a one-time fee of 10% (or whatever percent) of any change in value of the land from before the project to some number of years after completion. With this sort of financial mechanism, landowners all come out ahead, and the city also gets its profit, which can either be used to repay bondholders or the pension fund, or directly invest in the next round of this sort of idea.

In principle, I don’t see any reason why this wouldn’t work for sidewalks too, though perhaps sidewalks aren’t adequately incorporated into the value of land on the market.

Odysseus Bostick

I agree with most of the statements here regarding the practical value of a streetcar versus BRT. BRT would work just fine at far less of a cost.

However, you’ve got incredible traffic congestion in this area due to tourism. A BRT wouldn’t meet the “sexy” needs that a streetcar would with regards to its ability to attract riders.

Odysseus Bostick

These types of investments are not already authorized. It would make sense as a replacement for a very long term, low return investment designed to provide a foundational return.

Niall Huffman

Without doing the math, my instinct is that farebox recovery would need to be way higher than it currently is (like, several times higher) for the project to generate an acceptable ROI on fares alone. Which is why you don’t see a whole lot of private-sector investment in transit in the first place.

A value-capture mechanism along the lines of what Kenny describes (a version of an IFD, perhaps?) seems more feasible in theory.

Juan Matute

Everywhere in the world, and especially in LA, rail transit projects are a loss leader for transit-oriented developments. Given the claims I’ve already heard in Santa Monica about staff recommending approval on 8-story buildings because they want money for their pensions, I’d hate to be at the public meeting for a dense tower funded by public pensions. But perceptions aside, TOD is a very viable investment category that I believe CalPERS and CalSTRS already participate in.

Niall Huffman

Exactly. The benefits of transit (like most infrastructure) are largely externalized into the surrounding real estate market, so that’s where one should look to for revenue. Would be interesting for someone to do the math on a hypothetical Westside transit project to see if value capture could generate a sufficiently large return to make a PPP worthwhile. If I was still in grad school I’d turn it into a capstone project. ;-)

Odysseus Bostick

I think a creative index/basket of metrices would be necessary to realize even a modest profit, but the advantage of a pension plan is that there is a longer range of time available to realize those profits.

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